Supply Chain Management Definition: Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying customer service requirements. Notice: Who is involved Cost and Service Level It is all about integration

What is Supply Chain Management? Managing supply chain flows and assets, to maximize supply chain surplus. What is supply chain surplus? Notes: Supply chain surplus refers to what the customer has paid - total cost expended by supply chain in filling order. Supply chain surplus could be viewed as customer value (company’s contrinutions, tangibles & intangible to its customers?

Customers, demand centers sinks Field Warehouses: stocking points Sources: plants vendors ports Regional Warehouses: stocking points Supply Inventory & warehousing costs Production/ purchase costs Transportation costs Transportation costs Inventory & warehousing costs

What is a supply chain? P&G or other manufacturer Jewel or third party DC Jewel Supermarket Customer wants detergent and goes to Jewel Plastic Producer Tenneco Packaging Chemical manufacturer (e.g. Oil Company) Notes: Supply chain involves everybody, from the customer all the way to the last supplier. Key flows in the supply chain are - information, product, and cash. It is through these flows that a supply chain fills a customer order. The management of these flows is key to the success or failure of a firm. Give Dell & Compaq example, Amazon & Borders example to bring out the fact that all supply chain interaction is through these flows. Chemical manufacturer (e.g. Oil Company) Paper Manufacturer Timber Industry

Decision Phases in Supply Chain Supply Chain Strategy & Design Supply Chain Planning Supply Chain Operations

Supply Chain Strategy & Design Location & capacity of production and warehouses Products to manufactured and in which locations Mode of transportation Types of information systems to be used Strategic sourcing decisions

Supply Chain Planning Markets to be supplied & from which location Planned build-up of inventory Subcontracting of manufacturing Timing and size of market promotion Handling uncertainty in demand, foreign exchange fluctuations Establishing production plan under fixed strategic parameters

Supply Chain Operations Decisions over individual customer orders (daily, weekly) Less uncertainty about demand information Exploit reduction of uncertainty to optimize performance Establish deliver dates Establish order fill rate

Cycle View of Supply Chains Customer Customer Order Cycle Retailer Replenishment Cycle Distributor The supply chain is a concatenation of cycles with each cycle at the interface of two successive stages in the supply chain. Each cycle involves the customer stage placing an order and receiving it after it has been supplied by the supplier stage. One difference is in size of order. Second difference is in predictability of orders - orders in the procurement cycle are predictable once manufacturing planning has been done. This is the predominant view for ERP systems. It is a transaction level view and clearly defines each process and its owner. Manufacturing Cycle Manufacturer Procurement Cycle Supplier

Strategic Scope Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Strategic scope must cover all boxes, at least at the supply chain end. Each stage must have fit across its vertical boxes and supply chain strategy spanning all players. This fit allows the countering of multiple owners and helps avoid local optimization. Marketing Strategy

Strategic Scope Intracompany Intraoperation Scope Minimize local cost view Intracompany Intrafunctional Scope Minimize functional cost view Intracompany Interfunctional Scope Minimize company profit view Intercompany Interfunctional Scope Maximize supply chain surplus view

Supply Chain Challenges Achieving Global Optimization Conflicting Objectives Complex network of facilities System Variations over time

Supply Chain Challenges Achieving Global Optimization Conflicting Objectives Complex network of facilities System Variations over time Managing Uncertainty Matching Supply and Demand Demand is not the only source of uncertainty

Key Issues in Supply Chain Management Distribution Network Configuration Inventory Control Supply contract Distribution Strategies Supply Chain Integration & Strategic Partnering Outsourcing & Procurement Strategies In distribution network, major issues are warehouse location & capacities, production levels, transportation flows, etc. In inventory, we need to know how much to order and when to order to increase the inventory turns and minimize stock-outs Supply contract details the relationship between the suplier and the buyer in terms of pricing, volume discounts, delivery lead time returns, etc. In distribution strategy we need to decide whether we use cross-docking, warehousing strategy or direct shipping. Information sharing and operational planing are key to scm integration What are the firm’s core competencies? Is the company willing to assume the risk with outsourcing? Is it possible to leverage product design to compensate for uncertainties in customer demand? IT is a critical enabler to effective SCM. What is the quality and usefulness of the data? Customer value is a moving target since expectations are always increasing. Value may supersede quality and cost

Key Issues of SCM (cont) Product Design Information Technology & Decision Support System Customer Value

Relationships between key SCM Issues and the business environment Global Optimization Managing Uncertainty Dist. Conf. X Inv. Control Sup. Contract Dist. Strategies St. partnership Outsourcing Pr. Design IT & DSS Cust. Value

Prerequisites for Supply Chain Management Top management understanding & commitment Quest for excellence Effective and efficient communication Relationship instead of exchange Cross-functional teams Reality of team, partnerships & alliances (based on harmony & trust)

Supply Chain: The Magnitude In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of Gross Domestic Product). Transportation 58% Inventory 38% Management 4% Third party logistics services grew in 1998 by 15% to nearly $40 billion

Supply Chain: The Magnitude (continued) It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies. A typical box of cereal spends 104 days getting from factory to supermarket. A typical new car spends 15 days traveling from the factory to the dealership.

Supply Chain: The Magnitude (continued) Compaq computer estimates it lost $500 million to $1 billion in sales in 1995 because its laptops and desktops were not available when and where customers were ready to buy them. Boeing Aircraft, one of America’s leading capital goods producers, was forced to announce writedowns of $2.6 billion in October 1997. The reason? “Raw material shortages, internal and supplier parts shortages…”. (Wall Street Journal, Oct. 23, 1997)

Supply Chain: The Potential Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months. “According to P&G, the essence of its approach lies in manufacturers and suppliers working closely together …. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. (Journal of Business Strategy, Oct./Nov. 1997)

Supply Chain: The Potential Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999) using - Direct business model - Build-to-order strategy.

Supply Chain: The Potential In 10 years, Wal-Mart transformed itself by changing its logistics system. It has the highest sales per square foot, inventory turnover and operating profit of any discount retailer.

Supply Chain: The Complexity National Semiconductors: Production: Produces chips in six different locations: four in the US, one in Britain and one in Israel Chips are shipped to seven assembly locations in Southeast Asia. Distribution The final product is shipped to hundreds of facilities all over the world 20,000 different routes 12 different airlines are involved 95% of the products are delivered within 45 days 5% are delivered within 90 days.

Supply Chain Management: The Magnitude in the Traditional View Estimated that the grocery industry could save $30 billion (10% of operating cost by using effective logistics and supply chain strategies A typical box of cereal spends 104 days from factory to sale A typical car spends 15 days from factory to dealership Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago

Supply Chain Management: The True Magnitude Compaq estimates it lost $0.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed When the 1 gig processor was introduced by AMD, the price of the 800 meg processor dropped by 30% P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand

Drivers of Supply Chain Performance Efficiency Responsiveness Inventory Transportation Facilities Information Supply chain structure Drivers How does a supply chain make the efficiency / responsiveness tradeoff and position at the appropriate point - using Inventory, Transportation, Facilities, and Information decisions.

Considerations for Supply Chain Drivers

Achieving Strategic Fit Understanding the Customer Lot size Response time Service level Product variety Price Innovation Implied Demand Uncertainty

The Value Chain: Linking Supply Chain and Business Strategy New Product Strategy Marketing Strategy Supply Chain Strategy New Product Development Marketing and Sales Operations Distribution Service Finance, Accounting, Information Technology, Human Resources

Flows in a Supply Chain Supply Chain Customer Information Product Funds Supply Chain

Sequential Optimization vs. Global Optimization Procurement Planning Manufacturing Distribution Demand Sequential Optimization Supply Contracts/Collaboration/Information Systems and DSS Procurement Planning Manufacturing Distribution Demand Global Optimization Source: Duncan McFarlane

The Dynamics of the Supply Chain Production Plan Distributor Orders Retailer Orders Order Size Customer Demand What is shown here is how divergent these various forecasts are in relation to real demand. Why?? Because they are developed independently from each other and are dated, and unconnected to each other and the daily fluctuations in the market Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

The Dynamics of the Supply Chain Production Plan Order Size Customer Demand What is shown here is how divergent these various forecasts are in relation to real demand. Why?? Because they are developed independently from each other and are dated, and unconnected to each other and the daily fluctuations in the market Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998